In Advisory Opinion 2013-03A (http://www.dol.gov/ebsa/regs/AOs/ao2013-03a.html), the Department of Labor addresses what are commonly referred to as ERISA “budget accounts” or “fee recapture accounts.” In the Advisory Opinion, the DOL describes these accounts and discusses the plan asset and prohibited transaction issues related to them.

What is an ERISA Account?

ERISA accounts are accounts that contain revenue sharing payments (e.g., 12b-1 fees, shareholder and administrative service fees and similar payments) that plan service providers receive for providing investments to certain retirement plans covered by ERISA. In some cases, a service provider will agree with a plan to maintain a bookkeeping account of revenue sharing received in connection with plan investments. This bookkeeping account will reflect credits to the plan calculated by reference to the revenue sharing payments. Under an alternative arrangement, the service provider may deposit an amount into the plan account equal to the credits.

Are the Revenue Sharing Amounts Plan Assets?

If the service provider creates a bookkeeping account to reflect the credits, the bookkeeping account generally should not be considered a plan asset. However, if the plan has a contract with the service provider to pay specified plan expenses from the account, this contract right would be a plan asset. If the plan establishes a plan account to receive and hold revenue sharing payments from the service provider, these amounts would be plan assets.

Application of Prohibited Transaction Rules and Fiduciary Issues

These arrangements are subject to ERISA’s prohibited transaction rules. As the service provider is a party in interest to the plan in connection with these account arrangements, the arrangements must meet the conditions in Section 408(b)(2) of ERISA in order to be exempt arrangements (i.e., not prohibited transactions). Thus, the arrangements must be reasonable, necessary for the establishment and operation of the plan and provide no more than reasonable compensation for the services rendered.

In addition, general standards of fiduciary conduct apply to these arrangements.

Note also that the Advisory Opinion does not address any fiduciary issues that may arise from the allocation of revenue sharing among plan expenses or individual accounts or where the employer has the obligation to pay plan expenses.

Fee Disclosures

The fees paid to the service providers pursuant to these arrangements should be disclosed in the fee disclosures provided by service providers pursuant to Section 408(b)(2) of ERISA.

Form 5500 Schedule C Reporting

FAQs published by the Department of Labor explain how to report these arrangements on Schedule C of the Form 5500. See http://www.dol.gov/ebsa/faqs/faq-sch-C-supplement.html.

Key Takeaways

Plan sponsors should review their services agreements to understand how their ERISA “budget account” or “fee recapture account” arrangements are structured. The Advisory Opinion makes clear that the way the services agreement terms are drafted impacts whether or not the accounts are plan assets. If the accounts are plan assets, they must be allocated in accordance with ERISA requirements.

In addition, plan sponsors should review and understand the terms of the arrangements to make sure that the fees paid in connection with the arrangements are reasonable.

Employers with 50 or more full-time equivalent employees can breathe a little easier this morning, following the announcement by the Obama administration that it will delay key provisions of the new health care reform law. Specifically, this move by the administration will delay certain information reporting requirements under the Affordable Care Act and, most important, the employer shared responsibility payment requirements under Code Section 4980H. According to the announcement, these requirements will not apply until 2015.

The administration cites as reasons for the delay a recognition of the difficulty businesses have been facing while trying to implement the law and the need for additional time, as well as the fact that most businesses already provide health insurance coverage for their employees. During the one year delay, the administration hopes to simplify the reporting requirements, and give employers more time to make health coverage affordable and accessible for their employees. More guidance on what to expect during the delay, and after, is coming shortly. Stay tuned…

Two decisions issued by the United States Supreme Court on June 26, 2013 expand same-sex marriage rights and carry significant implications for employee benefit plans and employers sponsoring the plans. In United States v. Windsor, No. 12-307 (June 26, 2013), the Court ruled that Section 3 of the Defense of Marriage Act of 1996 (“DOMA”), which denied federal recognition of legally-married same-sex couples, was unconstitutional. Issued on the same day, Hollingsworth, et al. v. Perry, No. 12-144 (June 26, 2013), held that proponents of California’s “Proposition 8”, which amended the state constitution to define marriage as a union between a man and a woman, lacked standing to appeal a lower court ruling that Proposition 8 is unconstitutional.

Windsor and Hollingsworth will significantly impact employee benefit plans, their administration and the taxation of employee benefits. Plan sponsors, with counsel’s assistance, must examine their benefit plan documents, administrative forms (including beneficiary designation forms, benefit election forms, etc.) and systems to ensure that benefits are structured and administered in a manner that is consistent with applicable law. The decisions also raise a host of new questions and issues that will need to be resolved through legislative and regulatory guidance. For additional information about the Supreme Court’s decisions in Windsor and Hollingsworth and their impact on employers, please refer to this Jackson Lewis article: http://www.jacksonlewis.com/resources.php?NewsID=4532.

Employers that sponsor participant-directed individual account plans like 401(k)s and 403(b)s need to prepare for the annual disclosure requirement imposed on plan administrators under section 404 of the Employee Retirement Income Security Act. (See our earlier posts and article regarding the regulations that became effective last year.) 

Separate regulations required service providers to give plan administrators, by July 1, 2012, the detailed information plan administrators needed to comply with the initial participant disclosure requirement.   The deadline for that initial participant disclosure was August 30, 2012. Unless the employer reissued the information required for the participant annual disclosure subsequent to the first disclosure (in order to align the annual disclosure deadline date with the date on which other plan-wide disclosures are made, for example), the annual disclosure will need to be made by August 30, 2013. (It will need to be made earlier if the employer complied earlier than was required last year.) 

While third party administrators might prepare (and even distribute) these disclosures on behalf of plan administrators, the employer sponsoring the plan generally must ensure that it complies with the regulations. This is because the employer normally is the plan administrator and the applicable regulations impose this disclosure duty on plan administrators. Since service providers are required to give the detailed information needed for the plan administrator to make the annual disclosure to participants, employers should request the required information from the service providers now to ensure that the August 30th (or earlier) deadline is met.            

Finally, there is some “buzz” in the retirement plan community that the Department of Labor might adjust the timing rule described above to assist plan sponsors in aligning the date for distributing these disclosures with other plan-wide disclosures.  (At least three large associations of benefits professionals have asked the DOL to do so.)  We are following these developments and will post information about substantive future DOL guidance regarding these disclosures on this blog.

A provision of the 2010 health care reform law requires employers to provide notices, by March 1, 2013, to all employees regarding the availability of health coverage options through the state-based exchanges created pursuant to that law. In January, the Department of Labor had announced delayed enforcement of the exchange coverage notice provision (which added Section 18B to the Fair Labor Standards Act) in light of the reality that, by March 1st, it was unlikely that enough information regarding the exchanges would be available, employers had no way of ascertaining some of the other information required to be included in the notices, and the agency would not have regulations or other guidance ready. (See our prior post regarding the delayed enforcement.)

DOL issued temporary guidance on May 8, 2013 (Technical Release 2013-02) and model notices for employers to provide notice of coverage options through the exchanges, or what the federal government recently rebranded as “the Marketplace.” Employers are required to issue exchange coverage notice not later than October 1, 2013. The implication of the temporary guidance is that employers may use the model notices and rely on the temporary guidance earlier, but additional guidance and modifications to the model notices are expected. 

An exchange coverage notice must include –

  • information about the existence of the exchange, including a description of the services provided by the exchange and how to contact the exchange;
  • a statement that the employee may be eligible for subsidized exchange coverage (i.e., premium tax credit under Internal Revenue Code § 36B), if the employee obtains coverage through the exchange and the employer’s plan fails to meet a 60% minimum value; and
  • a statement that the employee may lose the employer contribution (if any) toward the cost of employer coverage (all or a portion of which may be excludable from income for Federal income tax purposes) if the employee obtains coverage through the exchange.

DOL created two model exchange coverage notices: one for employers who do not offer a health plan and the other for employers who do offer a health plan or some or all employees. 

The exchange coverage notice must be provided to each employee regardless of the employee’s status as full- or part-time and regardless of whether the employee participates in the employer’s group health plan. In addition to providing the exchange coverage notice to those employed before October 1, 2013, employers must provide the notice to each new employee (again, regardless of status) hired on or after October 1, 2013 within 14 days of hire.

DOL also modified and reissued its model COBRA election notice to include information about the availability of exchange coverage options and eliminate certain obsolete language in the earlier model. A copy of the new model COBRA election notice is available on the DOL’s COBRA webpage.            

The Department of Labor, Health and Human Services and the Treasury collectively published new FAQs regarding the requirement to provide a summary of benefits and coverage (SBC) under the Affordable Care Act (ACA) (http://www.dol.gov/ebsa/faqs/faq-aca14.html#footnotes).

The FAQs include an updated SBC template and an updated sample completed SBC (available at cciio.cms.gov and www.dol.gov/ebsa/healthreform).  It is noteworthy that the only change to the sample SBC is the addition of statements regarding whether the plan provides minimum essential coverage (MEC) (as defined in Section 5000A(f) of the Internal Revenue Code) and whether the plan meets the applicable minimum value (MV) requirements (i.e., the plan’s share of total allowed costs of benefits provided under the plan is not less than 60% of such costs).

The FAQs provide that no changes are being made to the uniform glossary or instructions to completing the SBC.

Takeaway: Plan sponsors should not need to spend time “reworking” their SBCs in connection with this new guidance if they were diligent in preparing their SBCs in the first year of applicability.

The FAQs also indicate that if a plan sponsor is already in the process of preparing its SBC for next year and it does not include the MEC and MV information in the SBC, it may provide information regarding whether the plan provides MEC and meets the applicable MV requirements in a cover letter.

Finally, the FAQs confirm that the agencies’ approach to compliance with ACA implementation is to work with employers to encourage compliance rather than to penalize employers who are working in good faith to comply with the ACA.  In connection with that approach, some of the enforcement relief published in earlier FAQs is being extended for an additional year.  This includes enforcement relief in connection with the electronic distribution of SBCs, the imposition of penalties for failing to provide SBCs, the provision of coverage examples, an issuer’s obligation to provide an SBC with respect to benefits it does not insure and enforcement regarding expatriate plans.

Proposed regulations published on March 21, 2013 addressed not only the 90-day waiting period rule discussed below but also the eventual elimination of notices of creditable coverage under HIPAA’s preexisting condition exclusions rules.

The 2010 health care reform law prohibits group health plans from imposing preexisting condition exclusions, effective for plan years beginning on or after January 1, 2014, but the law did not eliminate the requirement (under the 1996 health insurance portability law “HIPAA”) that group health plans and health insurance issuers provide HIPAA certificates of creditable coverage to plan participants. Since non-calendar year plans may continue to impose pre-existing condition limitations after January 1, 2014 and until the first day of the 2014 plan year, the proposed regulations would not eliminate the requirement to provide certificates of creditable coverage until after 2014. This is so that individuals needing to offset a pre-existing condition exclusion applicable under a non-calendar year plan would still have access to certificates for proof of coverage through December 31, 2014.

After 2014, the health care reform law’s prohibition on preexisting condition exclusions will make HIPAA’s detailed rules on the application of preexisting condition exclusions obsolete, so final regulations are expected to eliminate the requirement to provide certificates of creditable coverage. Until then, group health plans and health insurance issuers must continue to provide HIPAA certificates of creditable coverage.

Eighty-nine pages of proposed regulations confirm that employers may not impose a group health plan waiting period of more than 90 days. No surprise there – the prohibition already was set forth in the 2010 health care reform law. A waiting period that provides for coverage to start on the first day of the month following 90 days or following three months of service is prohibited after the 2013 plan year.  

The proposed regulations released by the Internal Revenue Service and Departments of Health and Human Services and Labor on March 18, 2013 are expected to be published March 21, 2013 and comments are due 60 days later.  

“Waiting period” would continue to be defined, under the proposed regulations, as the period that must pass before coverage for an employee or dependent who is otherwise eligible to enroll under the terms of a group health plan can become effective. Being “otherwise eligible to enroll” in a plan means having met the plan’s substantive eligibility conditions (such as being in an eligible job classification or achieving job related licensure requirements specified in the plan’s terms).

Other conditions for eligibility under the terms of a group health plan (i.e., those that are not based solely on the lapse of a time period) are generally permissible unless the condition is designed to avoid compliance with the 90-day waiting period limitation.

In terms of coordination with the employer shared responsibility provisions, if a group health plan conditions eligibility on an employee regularly having a specified number of hours of service per period (or working full-time), and it cannot be determined that a newly-hired employee is reasonably expected to regularly work that number of hours per period, the plan may take a reasonable period of time to determine whether the employee meets the plan’s eligibility condition, which may include a measurement period of no more than 12 months that begins on any date between the employee’s start date and the first day of the first calendar month following the employee’s start date. Except for cases in which a waiting period that exceeds 90 days is imposed in addition to a measurement period, the time period for determining whether a variable-hour employee meets the plan’s hours of service per period eligibility condition will not be considered to be designed to avoid compliance with the 90-day waiting period limitation if coverage is made effective no later than 13 months from the employee’s start date plus – if the employee’s start date is not the first day of a calendar month – the time remaining until the first day of the next calendar month.

Note that, if a group health plan or health insurance issuer conditions eligibility on an employee having completed a number of cumulative hours of service, the eligibility condition is not considered to be designed to avoid compliance with the 90-day waiting period limitation if the cumulative hours-of-service requirement does not exceed 1,200 hours.

Last week, the Department of Health and Human Services (“HHS”) and Internal Revenue Service (“IRS”) released a minimum value calculator to determine whether the percentage of the total allowed costs of benefits provided under a group health plan is at least 60% – a requirement in order for the employer plan to be treated as offering minimum essential coverage. If the employer’s plan meets the minimum value test and is affordable (i.e., single coverage does not cost an employee more than 9.5% of income) a fulltime employee cannot obtain subsidized Exchange coverage. An employee who does obtain subsidized Exchange coverage does not trigger employer penalties (see our prior post on this topic). 

The calculator was released “for informal external testing” in conjunction with HHS’ release of final regulations on the standards related to essential health benefits, actuarial value, and accreditation under the 2010 health care reform law. HHS also provided an explanation of the calculator methodology which, among other things, makes clear that the calculator is based on a standard population and data reflecting typical self-insured employee plans.   

As an alternative to the calculator and checklists, an employer may engage an actuary who is a member of the American Academy of Actuaries to determine, using generally accepted actuarial principles and methodologies, whether the plan meets the 60% minimum value threshold.

In addition, IRS said in previous guidance that it would release checklists employers may use as safe harbor methods for determining whether a plan meets the minimum value test. Those checklists have not yet been released but may be crucial for employers with plans that have nonstandard features and for which an actuarial determination is impractical.   

As explained in an earlier post, the 2010 health care reform law requires health plans to provide women’s preventive care and services without cost sharing. Regulations issued August 1, 2011 included all FDA-approved contraception for women in the definition of women’s preventive care and services. That includes abortion and abortifacient drugs (like the so-called “morning-after” pill). The regulations were effective for the first plan year beginning on or after August 1, 2012. The government released proposed regulations on January 30, 2013, that would amend those regulations.

Religious Employer Exemption. The regulations exempted “religious employers.” A religious employer was defined as an organization (1) for which the inculcation of religious values is its purpose, (2) that primarily employs and serves persons who share its religious tenets, and (3) that is a nonprofit organization described in Internal Revenue Code sections 6033(a)(1) and 6033(a)(3)(A)(i) or (iii). However, after receiving public comments, the government has decided that definition is too narrow. Therefore, the government proposes relaxing the definition by eliminating the first three requirements, so that a religious employer is one that is organized an operates as a nonprofit entity referred to in Code section 6033(a)(3)(A)(i) or (iii) – i.e., referring to churches, their integrated auxiliaries, and conventions or associations of churches as well as the exclusively religious activities of any religious order. Thus, the many religious entities that serve the needs of persons outside the entities’ own faith and employ individuals who do not necessarily share the entities’ religious tenets will be able to meet the proposed revised definition of religious employer.

Employer Objecting on Religious Grounds. Many organizations that do not meet the definition of religious employer nevertheless oppose contraception (or specific contraception like abortion) for religious reasons.  Last February, Health and Human Services (HHS) issued guidance providing a temporary enforcement safe harbor for certain employers with respect to the requirement to cover contraceptive services. That guidance allowed an additional year for a plan maintained by a non-profit organization whose plan consistently does not covered contraceptive services for religious reasons at any point from February 10, 2012, to comply with the requirement to do so. HHS issued a bulletin in August 2012 clarifying the February 2012 guidance. Now, the government proposes additional relief for such employers – permitting them to avoid covering contraceptive care under their own group health plans where the insurer (for full-insured plans) or third-party administrator (for self-funded plans) arranges for individual policies covering contraceptive care. The insurers issuing such policies would, in turn, be eligible to offset the cost of providing that specific coverage by claiming an adjustment in the Exchange fees they must pay.

Employers wishing to comment on these proposed regulations have 60 days from the date the proposed rule is published in the Federal Register to do so.